What do these terms and numbers mean?
What are Fair Value, Sell Active, Sell Threshold, Buy Threshold, and Buy Active?
When do sell programs and buy programs occur?

These terms indicate when index arbitrage program trading
activity could occur and, hence, could produce sudden and possibly sharp market movements.
Foreknowledge of the likelihood of an adverse program trade can help investors
determine the wisdom of initiating long or short positions in stocks, index futures,
Exchange Traded Funds (ETFs), and options.

Buy programs occur when the futures market is over-valued relative to the stock market
and consists of the index futures being sold and the stocks in the index being bought.
Sell programs, the opposite case, occur when the futures market is under-valued relative
to the stock market and consists of the index futures being bought and the stocks in the
index being sold. Over-valued and under-valued conditions arise because trading in the futures
and equities markets occurs independently. The key to determining these over or under-valued
conditions is the arithmetic difference between the futures and the spot index (which is known
as the premium).

The five terms of fair value, sell active, sell threshold, buy threshold,
and buy active refer to specific values of the arithmetic difference of an index futures contract
price minus its spot (or current) price. For example, if the S&P 500 futures contract
price is 1409 and the S&P 500 spot index is 1400, the difference is 9;
whether this particular difference has bearish or bullish implications depends on whether
it falls in the range of sell programs, no programs, or buy programs. This difference
between the futures contract price and the spot index is known by the various names
of premium, spread, and basis; the nomenclature adopted here will be premium (or prem). This
usage concurs with the CNBC ticker. As described previously, other data feeds use the symbol of
$PREM.X, $PREM, or SP-PREM for the S&P 500 premium and ND-PREM for the NASDAQ 100 premium.
The five significant values of the futures-spot premium
that delineate the program buying and selling ranges are described below:

Sell Programs

A sell program is the simultaneous (short)
sell of all (or almost all) the stocks in
the index (in weighted proportions) and the
purchase of the index futures contract.
Therefore, the stocks comprising the index
should decline and, correspondingly, the
index futures should rise, producing the
effect of a stock market decline and futures
market rise. Two significant values in the
sell program range are the sell active and the sell threshold values, described below:

No Programs

Buy Programs

A buy program is the simultaneous purchase
of all (or almost all) the stocks in the
index (in weighted proportions) and the sale
of the index futures contract. Therefore,
the stocks comprising the index should rise
and, correspondingly, the index futures
should decline, producing the effect of a
stock market rise and futures market decline.
Two significant values in the buy program
range are the buy threshold and the buy active values, described below:

Sell
Active (SA)

Sell
Threshold (ST)

Fair Value
(Premium) (FV)

Buy
Threshold (BT)

Buy
Active (BA)

This is the "futures - spot" index
premium value at which sell programs should
be prevalent, producing a meaningful decline
in the stock market.

In the graphs above, the sell active value
occurs on the left side where the probability
of a sell program approaches 100%.

This is the minimal "futures - spot"
index premium value at which sell programs
might be initiated. Sell programs are possible
and could cause a stock market decline.

In the graphs above, the sell threshold value
occurs on the left side where the probability
of a sell program is just greater than zero.

This is the "futures - spot" index
premium value at which the futures and the
equity markets are in equilibrium. No (profitable)
index arbitrage type programs will occur
at fair value nor when the "futures
- spot" premium level falls within the
range extending from the sell threshold to
the buy threshold.

This range occurs in the middle portion of
the above graphs where the probability of
any program activity is equal to zero and,
hence, falls on the horizontal axis.

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